Unit trusts have fixed, diversified portfolios of stocks or bonds, usually with known maturities and termination dates. With minimum investments of approximately $1,000, you can invest in a broad combination of securities that would be impractical or unaffordable if duplicated on an issue-by-issue basis. In certain circumstances, investors in the unit trusts are taxed as if they directly held the underlying securities.
Among the many types of unit trusts available-including equity trusts and trusts holding government bonds, insured and uninsured corporate bonds-the trusts that offer the greatest tax incentives are offered by tax-exempt trusts. Tax-exempt trusts consist of portfolios of municipal bonds that are generally exempt from federal income tax. The holding can be made up of either investment-grade or AAA-insured, and are issued in series of 5-, 10-, 15-, or 25- year average maturities. Certain municipal bonds may be subject to the Alternative Minimum Tax (AMT).
Additionally, state-specific issues, which contain municipal bonds that are double- or triple-exempt, are exempt from federal, state, and local taxation for residents of the issuing state.
In addition to tax-exempt trusts, there are a wide variety of taxable trusts, including those holding portfolios of corporate bonds, GNMAs, Freddie Macs, Treasury bonds, or other U.S. agency securities.